Commentary and musings on the complex, fascinating and peculiar world that is securities regulation

Monday, October 18, 2010

IOSCO Forms Task Force to Globally Coordinate Derivatives Regulation, With SEC and CFTC in Lead Roles

With the Dodd-Frank Act mandating the federal regulation of derivatives and the EU committed to quickly act on legislation regulating derivatives, the International Organization of Securities Commissions (IOSCO) has formed a Task Force on OTC Derivatives Regulation to coordinate cross-border the efforts of securities and futures regulators to develop oversight structures related to the OTC derivatives markets. The Task Force will develop mechanisms to encourage consistency among IOSCO members with regard to derivatives regulation. Since OTC derivatives also fall within the remit of other regulators and central banks, coordination and cooperation with other standard setters and relevant authorities will be an important dimension of the Task Force’s work.

The broad goal of IOSCO is the convergence of derivatives regulation to reduce the potential for conflicts of law and regulatory arbitrage, and mitigate systemic risk. The Task Force will be led by the SEC, the CFTC, the UK FSA and the Securities and Exchange Board of India. The European Commission and the new, as of January 1, 2011, European Securities Markets Authority have been named observers to the Task Force.

Section 752 of Dodd-Frank directs the SEC and CFTC to consult and coordinate with non-US regulators on the establishment of consistent international standards regarding the regulation of swaps and security-based swaps. Section 752 also authorizes the SEC and CFTC to enter into information-sharing arrangements with non-US regulators.

Ethiopis Tafara, SEC Director of International Affairs, said that IOSCO’s efforts to create consistent international standards for derivatives regulation will promote a consistently high approach that will help limit the types of systemic risks OTC derivatives can pose to the global market while also countering the possibility of regulatory arbitrage and any race-to-the-bottom pressures jurisdictions may face as these new regulations are crafted. According to Robert Cook, Director of the Division of Trading Markets, the SEC division charged with writing the Dodd-Frank mandated derivatives regulations, the task force will be an important vehicle for consultation and coordination on the establishment of consistent international standards.

Specifically, the IOSCO Task Force will develop consistent international standards related to OTC derivatives regulation in the areas of clearing, trading, trade data collection and reporting, and the oversight of market participants. It will coordinate other international initiatives relating to OTC derivatives regulation, including addressing the recommendations by the OTC Derivatives Working Group for additional analysis of exchange and electronic platform trading, as well as data reporting and aggregation requirements for OTC derivatives. In addition, the Task Force will serve as a centralized group within IOSCO through which IOSCO members can consult and coordinate generally on issues relating to OTC derivatives regulation.

As part of its work, the Task Force will produce the following reports on a sequential and scheduled basis. By the end of January, 2011, the Task Force will issue a report evaluating the benefits and the challenges associated with implementing measures aimed at increasing exchange and electronic trading. The report will also assess whether it would be appropriate to draft international standards related to exchange and electronic platform trading. In July 2011, the Task Force will issue a report setting out minimum data reporting requirements and the methodology and mechanism for the global aggregation of data for market participants reporting to trade repositories and for trade repositories reporting to the public and to regulators for the purpose of macro- and micro- surveillance. Finally, in January of 2012, the Task Force will issue a report detailing consistent international standards for OTC derivatives regulation in the areas of trading, data reporting, clearing, and the oversight of swap dealers and other market participants and, to the extent desirable and feasible, exchange and electronic trading.